Incremental budgeting is a method where you build next period's budget by making small adjustments to your current one, instead of starting from scratch. You take your existing numbers as a baseline and nudge each line up or down for inflation, price changes, new hires, or new software. It's one of the most widely used budgeting methods because it's fast, simple, and easy to repeat every cycle.
If you're looking for a straightforward way to keep your finances consistent year over year, incremental budgeting might be the right fit. It's one of several approaches we cover in our guide to business budgeting methods, so it's worth understanding how it works before you commit to it.
What is incremental budgeting?
Incremental budgeting is a method where you prepare a new budget by making small changes to your current budget amounts for a given period. This method is one of the most commonly used, as it's simple and can be used for a variety of different budgets: departmental budgets, project budgets, and payroll among them.
It's based on the idea that a new budget can become better by making only marginal changes to the current allocations. You start with your historical allocations as a baseline and make minor adjustments until your new budget is complete. Assumptions are then added to or subtracted from the original amounts to determine the new budget.
Incremental vs. zero-based budgeting
Zero-based budgeting is a method where you must justify all earnings and expenses for each fiscal period. So how does it differ from incremental budgeting?
While incremental budgeting starts with your current budget and adjusts the existing numbers, zero-based budgeting starts with a completely clean slate for each period, without any reference to previous budget years. You build every line from scratch. As a result, incremental budgeting is usually quicker and simpler than zero-based budgeting, while zero-based budgeting is more thorough at catching spending that no longer earns its place.
When is incremental budgeting the right choice?
Incremental budgeting works best when your business is stable and your costs are predictable from one year to the next. If most of your spending is fixed—rent, payroll, loan payments, software—and it changes only gradually, adjusting last year's numbers is faster and accurate enough for planning.
It's a poor fit when you're launching a new product line, cutting costs after a downturn, or rethinking how you spend from the ground up. In those situations, zero-based budgeting forces you to justify every dollar and tends to surface spending that incremental budgeting would quietly carry forward. A practical middle path is to run incremental budgeting most years, then do a full zero-based review every few years to clear out costs that no longer pull their weight.
Incremental budgeting steps
One of the most noteworthy advantages of incremental budgeting is that it's less difficult—and less time-consuming—because your fixed expenses have already been budgeted.
Fixed expenses may include:
Rent
Utilities
Payroll
Business loan payments
Taxes
Software
So when it comes time to build an incremental budget, you'll follow a couple of simple steps: adjusting and forecasting your expenses.
Step 1. Adjust
The first step in creating any well-executed budget is understanding your finances.
Review each line item of your current budget to understand your fixed expenses and make incremental adjustments. Base these adjustments on factors like inflation, sales prices, cost of goods, or other aspects that affect your bottom line. Your allocations get adjusted up or down depending on the factors at play. Continue until you've adjusted every line item on your current budget.
Step 2. Forecast
Once you've adjusted all fixed expenses, forecast your expenses based on the new allocations. You can do this with the incremental budgeting formula: new expense − old expense = budget change.
Add or subtract the adjusted expenses from the old ones to show the change in budget for the upcoming fiscal year. Your new budget will largely resemble your old one, with minor cost differences.
Incremental budgeting example
Let's walk through an example of incremental budgeting in action.
Say you're working on a new payroll budget for the upcoming fiscal year. You look at your current budget to base next year's allocations on, then make changes based on new-hire support and inflation.
Department | Current payroll budget | New payroll budget | Percent change |
|---|---|---|---|
Operations | $20,000 | $15,000 | −25% |
Human Resources | $25,000 | $30,000 | +20% |
Administration | $15,000 | $35,000 | +133% |
Marketing | $20,000 | $35,000 | +75% |
Accounting | $10,000 | $15,000 | +50% |
Taxes | $5,400 | $7,800 | +44% |
Total budget | $95,400 | $137,800 | +44% |
After small adjustments to each allocation, your new payroll budget is complete. It's bigger this year because of inflation and payroll changes—but because you outlined these adjustments ahead of time, you can prevent cash flow roadblocks before they hit.
Pros and cons of incremental budgeting
While it's one of the simplest budgeting methods, incremental budgeting is also one of the more controversial, because many believe it can lead to unnecessary spending.
That said, there are real advantages to the method. From its simplicity to its consistency, it can offer a lot for the right business. Here are the main incremental budgeting advantages and disadvantages.
Incremental budgeting pros:
Uses your current budget to save time.
Requires only simple calculations.
Stays fairly consistent over time.
Makes expenses easy to predict.
Involves fewer internal disputes over allocations.
Incremental budgeting cons:
Can lead to overspending instead of being conservative with cash.
Doesn't account for unforeseen changes or factors outside last year's budget.
Can discourage leadership from examining expenses in depth.
How to stick to your incremental budget
The hard part comes next: actually sticking to your budget. Learning how to run an incremental budget doesn't happen overnight—it takes time to refine. Here are a few tips to stay consistent.
Stick to a schedule. Because the incremental method depends on your current budget to inform changes, keeping that budget up to date matters. Schedule time to budget every quarter or, at minimum, yearly.
Review and adjust. Budgets are fluid and change with your goals and circumstances. Because your business changes quickly, review and adjust regularly to keep up with industry shifts, staffing, and the cost of goods. You can also use the digital envelope system to portion out your revenue and categorize each type of business expense, so you can't spend more than you have.
Use money management software. The manual work is where budgets fall apart. Money management software takes that off your plate. A banking platform like Relay lets you categorize your budget, get visibility into your cash flow, and automate your payments—and pairs well with budgeting software built for small businesses.
If you're ready to put an incremental budget into practice, opening a Relay account gives you the structure to do it: up to 20 checking accounts with no monthly maintenance fees, automated percentage-based transfers, and real-time visibility across every account so you can see exactly what's allocated where.
Frequently asked questions
What is incremental budgeting in simple terms?
Incremental budgeting is when you build a new budget by taking your current one and adjusting each line up or down—for inflation, price changes, or new spending—rather than rebuilding it from zero. It's fast because most of the work is already done.
What is an example of incremental budgeting?
Say your payroll budget was $95,400 last year. For the coming year you raise some departments for new hires and inflation and trim others, landing at $137,800. You didn't rebuild the budget from scratch—you adjusted last year's numbers line by line to get there.
What are the advantages and disadvantages of incremental budgeting?
The advantages are speed, simplicity, and consistency: it reuses your current budget, needs only basic math, and makes expenses easy to predict. The disadvantages are that it can carry forward unnecessary spending, doesn't account for big changes, and can discourage leadership from scrutinizing costs closely.
What is the difference between incremental and zero-based budgeting?
Incremental budgeting starts from your existing budget and makes small adjustments. Zero-based budgeting starts from a blank slate every period and requires you to justify every expense from scratch. Incremental is faster; zero-based is more thorough at removing spending that no longer earns its place.
